How to Protect Your Child's Inheritance From Their Spouse

Daughter talking about estate planning with Elderly mother
••• Camille Tokerud Photography Inc. / Getty Images

For individuals looking to bequeath their assets to their grandchildren, it is critically important to openly discuss estate planning goals with their adult children. This frank discussion will ensure they separate their inherited assets from those subject to categorization as marital assets. One reason a grandparent may want to approach this delicate topic is to make sure that inheritance is protected in the case of adult children divorcing or remarrying. Ideally, these discussions should happen before an adult child marries, so they can solidify any specific inheritance terms in a prenuptial agreement.

Of course, in most states, inheritances made specifically to one spouse are exempt from divorce settlements—even if the inheritance occurs during the time of the marriage. But far too often, beneficiaries muddy the inheritance issue, by commingling or combining these assets with marital property in a joint account.

Bequeathing a Specific Share for Grandchildren

Another way to ensure future generations receive an inheritance is by drafting a will. The will should clearly earmark the specific dollar amount or percentage of the estate for each of the surviving grandchildren. This ensures grandchildren will directly receive a portion of your estate—regardless of what your adult children do with their gifts. Your will may also specify that the assets be used for specific purposes, such as college educations or weddings.

An individual retirement account (IRA) may be left to grandchildren directly. The IRA must be structured as a stretch IRA. This structure will effectively limit grandchildren to taking only the required minimum distributions (RMDs) over their lives. In theory, a properly-invested IRA will earn greater returns than the annual RMDs, allowing the principal to continue growing.

If your grandchildren are too young to negotiate the RMDs, it may be worth establishing an IRA Inheritance Trust, that names an institutional trustee to oversee the investments and to dictate distributions.

Set Up Lifetime "Dynasty" Trusts

When leaving someone an inheritance, it automatically becomes subject to creditors' claims, including judgment holders in lawsuits. To combat this, consider continuing the adult child's trust for their entire lifetime. You can accomplish this with a properly-drafted dynasty trust. This option offers everlasting asset protection from creditors. Lifetime dynasty trusts are particularly helpful if your adult child is unskilled at managing money, spends carelessly, or makes frequent bad decisions. 

The Bottom Line

If you wish to ensure that your grandchildren receive a portion of your money, discuss your intentions with your adult children and put together a comprehensive legal plan, that locks in your intentions.